Citation

Discussion Paper Details

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Title: Do Risk Premia Protect from Banking Crises?

Author(s): Hans Gersbach and Jan Wenzelburger

Publication Date: February 2005

Keyword(s): banking crises, banking regulation, financial intermediation, macroeconomic risks and risk premia

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

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Bibliographic Reference

Gersbach, H and Wenzelburger, J. 2005. 'Do Risk Premia Protect from Banking Crises?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4935